Benefits of investing through insurance

Insurance companies often make headlines for all the wrong reasons, such as selling off equities and destabilising the market.

But for fund distributors, insurance companies are a gateway to a whole new customer base. Today’s emphasis on “best of breed” has led insurers to provide client access to the widest possible range of investment funds. Some even offer hedge funds. Long gone are the days of “own brand only.” Investing through insurance provides valuable tax benefits for customers – so valuable that the UK Government is considering changes. The Holy Grail for most investors is ability to improve performance without increasing risk. One way of achieving this is to incorporate some tax efficiency. Insurance allows investors to “wrap” their portfolio, so tax is not charged for any profit from trading between different funds. All of the gains can be reinvested in new assets, rather than just net profit after tax. Income may also be accumulated – there is no need to distribute this if it is not required. So investors in lower risk assets such as cash, bonds and guaranteed investments can avoid an immediate tax charge if they do not need the income. Insurance policies can accept regular contributions – in the UK these must continue for 10 years to take advantage of tax breaks – or a single investment. Single premium policies, also known as offshore bonds, allow UK residents regular withdrawals to provide income, without immediate tax liability. Investors can withdraw up to 5 per cent of the original investment each year, until the amount of the original investment has been withdrawn, but they do not have to pay tax until the bond is encashed. Any of the 5 per cent withdrawal “allowance” unused in a particular year can be carried forward. An individual, or their adviser, company or trust can purchase an offshore bond to hold their proposed portfolio. Offshore bonds can hold a range of investments, from cash and fixed interest securities to equities, hedge funds and structured investments such as those incorporating guarantees. But UK residents can no longer invest directly in individual securities. A portfolio can be created by selecting investments from the insurance company’s menu. In this way the UK is similar to France and other countries. Many insurers allow investors to select funds not included on their lists, as long as they meet certain criteria, or transfer the portfolio into the custody of their portfolio manager to be administered on an entirely discretionary basis. Christine Ross is head of Financial Planning at SG Hambros in London